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John Rogers: How To Beat The Index By 100 Basis Points Every Year

Here’s a great interview with John Rogers and Charlie Bobrinskoy from Ariel Investments. The Ariel portfolio is currently valued at $8.91 Billion, and has been regularly beating the index by 100 basis points per year. So how do they do it?

Here’s an excerpt from the interview:

Don’t you hear all the time that “you’re wasting your time researching individual stocks. Just buy an ETF and go to the beach.”

John: The good news is that we’ve been able to show over 35 years in business that it works doing it our way. We also do think that eventually there’s going to be some kind of reckoning for the ETF investors. Charlie has done more work on that than I.

Charlie: You hear all the time that you can’t beat the indexes, but the Ariel Fund, even after its fees, has beaten each relevant index by more that 100 basis points per year. That adds up over time.

That’s a big differentiation. Then, in the last 10 years we’ve beaten the indexes by close to 400 basis points. So this works. It has become a cliché that you can’t beat the indexes, but it’s just not true.

Now, if you want to beat over a short period of time…

Good luck with that.

Charlie: Absolutely. You have to look at longer timeframes. You can’t tell somebody that you’re going to outperform every quarter or even every year – you can’t – but we do know there’s a lot of evidence that this way of investing generates excess returns over long periods of time. The reason actually…

And we’ve spent a lot of time on this – is that although we think the market is very efficient, there is one big inefficiency. And that is that people are too focused on the short-term.

Extraordinarily focused on the short-term.

Charlie: Just do the math on the value of a stock. It’s the present value of the cash flows into perpetuity. If you actually do the math, less than 7% or 8% of that value is in the next year; 90% of the value is in years two, three, four, five – and then forever. But people are compensated on their abilities to make shorter term calls. So all of the focus, we would say – or more than half of the focus – is placed on what’s going to happen in the next year.

This means that if you can find situations that have some kind of trouble – a clear problem – in the short-term, but have a great long-term cash flow outlook, you can buy those names. Yes, you’ll suffer the short-term fluctuations, but you’ll do well in the long-term. That’s why the motto of the firm is “slow and steady wins the race” and that’s why the tortoise is the logo.

We talk about small cap and mid cap value, but it’s also just a patient outlook that’s been at the core of the outperformance.